Derivative Liabilities

The investor and placement agent warrants, issued in connection
with a registered direct offering in September 2016, contained a
provision for net cash settlement in the event that there is a
fundamental transaction (contractually defined as a merger, sale of
substantially all assets, tender offer or share exchange, whereby
such other Person or group acquires more than 50% of the
outstanding common stock). If a fundamental transaction occurs
in which the consideration issued consists principally of cash or
stock in a successor entity, then the warrantholder has the option
to receive cash equal to the fair value of the remaining
unexercised portion of the warrant. Due to this contingent
cash settlement provision, the investor and placement agent
warrants require liability classification as derivatives in
accordance with ASC 480 and ASC 815 and are recorded at fair
value.

The following tables summarize the fair value of the warrant
derivative liability and related common shares as of inception date
September 15, 2016, May 31, 2018, August 31, 2018
and November 30, 2018:

Shares Indexed

Derivative Liability

Inception date September 15, 2016

7,733,334

$

5,179,200

Balance May 31, 2018

7,733,334

$

1,323,732

Balance August 31, 2018

7,733,334

$

2,071,199

Balance November 30, 2018

7,733,334

$

1,789,066

The Company recognized approximately $466,000 of non-cash loss and approximately
$467,000 of non-cash gain,
due to the changes in the fair value of the liability associated
with such classified warrants during the six months ended
November 30, 2018 and November 30, 2017,
respectively.

ASC 820 provides requirements for disclosure of liabilities that
are measured at fair value on a recurring basis in periods
subsequent to the initial recognition. Fair values for the warrants
were determined using a Binomial Lattice (“Lattice”)
valuation model.

The Company estimated the fair value of the warrant derivative
liability as of inception date September 15, 2016,
May 31, 2018 and November 30, 2018, using the following
assumptions:

September 15,
2016

May 31,
2018

November 30,
2018

Fair value of underlying stock

$

0.78

$

0.49

$

0.58

Risk free rate

1.20

%

2.63

%

2.83

%

Expected term (in years)

5

3.3

2.79

Stock price volatility

106

%

64

%

62

%

Expected dividend yield

—

—

—

Probability of Fundamental Transaction

50

%

50

%

95

%

Probability of holder requesting cash payment

50

%

50

%

50

%

Due to the fundamental transaction provision contained in the
warrants, which could provide for early redemption of the warrants,
the model also considered subjective assumptions related to the
fundamental transaction provision. The fair value of the warrants
will be significantly influenced by the fair value of the
Company’s stock price, stock price volatility, changes in
interest rates and management’s assumptions related to the
fundamental transaction provisions.

As described above in Note 4, the redemption provision embedded in
the Note required bifurcation and measurement at fair value as a
derivative. The fair value of the convertible note redemption
provision derivative liability was calculated using a Monte Carlo
Simulation which uses randomly generated stock-price paths obtained
through a Geometric Brownian Motion stock price simulation. Various
assumptions used in the valuation model included: annual volatility
of 58.8%, risk free rate of 2.78%, an exercise factor of 2x and an
expected term of 1.61 years.

The fair value of the derivative liability resulting from the
redemption provision was approximately $1.28 million as of its
inception date, November 15, 2018 and November 30, 2018.
The fair value of the redemption provision will be significantly
influenced by the fair value of the Company’s stock price,
stock price volatility, changes in interest rates and
management’s assumptions related to the redemption factor.
The Company recognized approximately $1,100 of non-cash loss, due to the changes in
the fair value of the liability associated with such classified
redemption provision between the inception date and
November 30, 2018.

The following table summarizes the fair value of the convertible
note redemption provision derivative liability as of inception date
November 15, 2018 and November 30, 2018:

Net Proceeds

Derivative
Liability

Inception date, November 15, 2018

$

5,000,000

$

1,284,998

Balance November 30, 2018

$

5,000,000

$

1,286,076

The Company estimated the fair value of the redemption provision
using the following assumptions on the closing date of
November 15, 2015 and November 30, 2018:

The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts.